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Economy at the verge of years: what was done and what to do
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Economy needs a new structure…
The macroeconomic situation brought positive results at the end of the year. In particular, the economic growth rate makes 2010 a year of special economic evolution and any critical spirit should recognise it. But this growth rate would unlikely last, should it keep relying on consumption, and authorities themselves have signalled this factRO. This is normal, as imports have grown and more collections came from excises on imports, transfers from abroad (particularly remittances) have also increased, compared with last year. The fiscal correction (rise of some taxes and fees) brought positive results and strengthened public funds; fiscal incomes to the budget have increased and maintained social payments at reasonable levels. However, the fiscal evasion is high so far, with formal statistics indicating about 20 percent of GDP. But a growth cannot be based on tax rises exclusively, and (any) investments would be the main chain, as they provide a long-term economic growth.
Productive sector is on the rise, labour market indicators fall down…
What has happened and happens in industry, agriculture, and building sector is a positive signal in terms of external demand. All these sectors made progress last year. However, the condition of agriculture did not change much compared with the situation before the crisis. Moldova has so far the same extensive, retardant and undeveloped agriculture. It does not have agriculture like neighbours like Romania or Ukraine, and the perturbation of this sector would seriously hit the economy and would provoke regress. Contribution of these two sectors to GDP dropped much the last time, with consumption and services being the growth engine in fact. Official statistics indicate a pretty active service sector which holds about 66 percent of the share. But consumption does not have much room for growth in 2011, as people do not earn much and are careful with their expenses. On the other hand, the development of these sectors could not resuscitate some indicators of labour market. The unemployment is on the rise, with official accounts showing that it could exceed 7 percent in 2010, compared with an employment rate of under 20 percent. One may say that 2010 was the year of job race, and there is a danger that this scenario will not change in 2011. In fact, jobs will be the key obsession of people.
Relations with development partners — better than never before…
The resumption of funding by main international creditors kept the Moldovan economy on waterline. The government tried to do its best for a fiscal consolidation and recovery of public funds, and it generally succeeded. The resumption of crediting by IMF and other development partners is a great advantage got by Moldova in 2010, and it absorbed massive funds from abroad. If Moldova failed to get funding from IMF, EU and World Bank, the public debt service would exceeded 3 percent. And this action compensated the necessary expenses, inclusively budgetary, as well as opened social and infrastructure projects (roads, water pipes, etc.) which could encourage the economic recovery starting 2011. The start of negotiations before formal talks concerning the Comprehensive and Deep Free Exchange Agreement, as well as Association Agreement is also part of Government’s accomplishments.
2010 — year when we face awesome crisis…
Such a period when the political affronted the economic so strong was never observed before. Although it was a year of political contrasts, 2010 ended with a good perspective for many economic sectors, particularly a year when Moldova also faced the awesome financial and economic crisis. It was a year of grace for the Moldova-EU relationship, inclusively on economic and commercial dimension. It was a year when Moldova managed to consolidate public funds and achieved a social cohesion, with authorities avoiding scenarios like those used by neighbours, which reduced wages, pensions or other social payments. People is very optimistic with the new government, so that to see a continuity of what was already done.
Reflections on some economic implications from 2011
We consider that optimising public funds will be the No.1 challenge for 2011, so that Moldova shall not avoid fiscal consolidation measures in continuation. The country shall either reduce many expenses or find a way to increase taxes and fees, or even to combine both, so that to recover public funds as soon as possible.
But this package should be accompanied by reasonable measures capable to strengthen the investment process. Even more, 2011 begins with an approved functional budget. Respectively, authorities could face social challenges. It would be hard to handle potential challenges without necessary investments (both foreign and local), and for this purpose, authorities should focus on absorbing foreign funds, in particular, from the EU, which has become very intensive. Absorbing foreign funds is more than necessary. This sector is the adrenaline needed when one cannot rely on consumption or private investments. Moldova shall be ready for serious negotiations with the EU starting the first months of 2011, as formal talks on the Association Agreement and Free Trade Agreement will begin in this period. It will need energy and much intelligence in terms of foreign economic diplomacy.
Internal risks associated with external risks…
The announced rise of imported gas prices could affect the course of economy, but most the purchase power of population. The situation could develop, as price rises bring economic and psychological premises needed for the rise of prices of other goods and products. Dearer fuels could finally become a certain source to fuel inflation. In addition, the potential price rise for natural gas could leave room for dearer electricity. There is also a high risk which could turn down the estimates and could be above manoeuvre area of local authorities. We do not know and cannot anticipate what will happen in the euro zone or monetary union because of the crisis of sovereign debts. We may testimony a development of the external war of currencies capable to hit the international trade and the foreign trade of Moldova. Foreign trade of basic products could also be a negative shock for our economy, especially on inflation dimension, and this could visibly affect the purchase power of population. If the situation in the euro zone does not get complicated to freeze credit markets again, like it happened in 2010 and 2009, the domestic economy could keep growing.
As we have already noted, Moldova will have to revive public funds for a long-term, that means deep restructuring of public spending, larger allocations for investment, larger internal savings capable to provide a less vulnerable capital formation, larger production for export to cover the internal demand. Authorities should focus on small and medium enterprises which build the economic system of the country, as these enterprises do not enjoy much access to crediting. They should punish more for abuses of predominant position on market, and advantage more flexible markets and remove monopolies.
Currency market and eventual evolutions of exchange rate…
The monetary and currency market in 2010 could be influenced by possible turbulences in the region and euro zone. In this conjuncture, stability of exchange rate is much more important than liberalisation or light devaluation. Of course, a weaker leu could advantage exporters, but Moldova could wait, as foreign markets are blocked and not so avid of Moldovan products. In addition, as stronger, more stable leu encourages a lower inflation. Or, Moldova does not make much progress in this field. That’s why the country should not take risks in this respect. Even more, devaluation would resuscitate the panic of population, and this would be worse than the regress of economic indicators. In fact, the exchange rate in 2011 will depend on failure or success of fiscal and budgetary recovery, which was discussed much the last time. An economy could adjust through two levers — fiscal-budgetary and monetary-currency lever. If authorities fail to achieve necessary budgetary collections, the National Bank will not have any alternative for depreciation of currency, the least this would be the economic logic. The good contributing relationship established by authorities with international financial organisations in 2010, particularly with IMF and WB will be a positive signal for international and other investors in 2011. It will not be an easy year for sure, given the economic conjuncture and potential political dodges, but problems could be settled at least partly through much work, intelligence, patience and ambition.